The Voluntary Fully Funded Pension Insurance Third Pillar

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• The Voluntary Fully Funded Pension Insurance
  (Third Pillar)
• in the Macedonian Pension System

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Agenda

• Introduction to Macedonia
• Current Macedonian Pension System
• Solidarity (pay-as-you-go) system
• Mandatory fully funded system
• Voluntary Pension System Philosophy and Design
• Potential Size of Voluntary Pension System
• Statistics

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Introduction to Macedonia

• Area 25,713 sq km
• Population (2002) 2,022,547
• Source State Statistical Office

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Current Macedonian Pension System

• Mandatory rationalized PAYG system (first pillar)
• Mandatory fully funded system (second pillar)
• Voluntary fully funded system (third pillar)

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Pension system, key institutions

• Ministry of Labor and Social Policy
• Pension and Disability Insurance Fund of
  Macedonia
• Pension Supervision Agency (MAPAS)
• Pension Companies and Pension Funds - Mandatory
• Custodian bank (National Bank of the Republic of
  Macedonia second pillar transitory)

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Characteristics of the pension system before the
reform

• PAYG, DB
• Existing for over 50 years
• Mandatory
• Comprehensive, broad coverage

• Types of benefits
• Old age
• Survivors
• Disability
• Min. guarantee
• Max.

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Parametric changes of the PAYG system

• Increase of the retirement age (64/62)
• Age exclusive condition with minimum service
  requirement of 15 years
• Decrease of the replacement rate (80 ?72)
• Change of pension indexation method
• (50 CPI, 50 wage growth)
• Ceiling on second pillar contributions (3 times
  average wage)

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Pension reform summary

• Solidarity PAYG system modified
• Mandatory fully funded system introduced in
  2005/2006
• Transition Rules
• Hired on or after January 1, 2003 must join
  reformed pension system (PAYG fully funded)
• Hired before January 1, 2003 had one-time option
  to join voluntary (up to December 31, 2005)
• Those joining reformed system had future
  solidarity benefits reduced

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Contributions and benefits in the two-pillar
system

• Total contribution rate 21.2 of gross wage
• First pillar 13.78
• old age (30), disability and survivors
  pension, and minimum guarantee
• Second pillar 7.42
• old age pension

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Design of the Second Fully-Funded Pillar
Regulation based on a Draconian method

• Centralized payment of the contributions and
  record keeping
• 2 Pension Companies for managing one pension fund
  each selected in international bidding process
• Custodian
• Supervision and regulation
• (proactive supervision at the beginning)
• Guarantees
• Tax treatment EET

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Second Pillar Organization Chart
MLSP
NBRM Custodian
PDIF
MAPAS
Pension Company
Pension Company
Pension Fund
Pension Fund
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Second pillar start and implementation

• International public tender for issuing licenses
  to establish two Pension Companies for managing
  one Pension Fund each
• April 2005 - Two licenses granted to Pension
  Companies with mixed capital (domestic and
  foreign)
• September 2005 Start of Membership Process
• January 2006 Start of second pillar
  contributions flow
• January 2008 Transfer process for members shall
  start
• Planned for January 2008 opening of market,
  licensing of new Pension Companies allowed

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Second pillar statistics members
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Second pillar statistics members age structure
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Second pillar statisticsValue of the Pension
Funds Net assets
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Second pillar statistics- Pension Funds
Investment portfolio (September 30, 2007)
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Voluntary fully funded pension pillar

• Philosophy
• Design
• System Safety
• Estimated Size of Market

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Philosophy

• Start simple
• Pension companies and pension funds only
• One pension company, one voluntary fund
• Custodian commercial bank
• Open licensing process
• Build from mandatory system model
• Allow individual and occupational pension savings
  schemes
• More flexibility than mandatory system
• Expand system over time

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Design features

• Primary objective
• Eligibility
• Occupational pension schemes
• Contributions
• Fees
• Investments
• Benefits
• Taxation

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Primary objective

• To provide higher income after retirement to the
  insurers covered with the first and second pillar
• To provide retirement benefits to persons not
  covered with the mandatory pension insurance
• To provide preconditions for organizing and
  financing occupational plans

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Eligibility

• Anyone 18 or older may participate
• (must start withdrawing at age 70)
• Membership
• Individual signs membership contract with a
  Pension Company
• Employer organizes and finances occupation scheme
  for its employees via Pension Companies
• Third party contributions are permitted

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Occupational pension schemes (1)

• Sponsored by employer(s) or association
• Sponsor negotiates contract with Pension Company
• All contributions made by Sponsor
• Sponsor pays all administrative costs

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Occupational pension schemes (2)

• Choice of pension fund must be in best interests
  of members
• If no longer an employee, must transfer balance
  to another occupational fund or an individual fund

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Fees

• Permitted fee types
• Percent of contributions (max 7)
• Percent of assets (max 0.15 monthly)
• Transfer fees permitted during first year of
  participation
• Fee must be same for everyone
• Exceptions
• Fees can decline as years of participation
  increase or
• Fees for occupational pension schemes might be
  different

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Investments

• Primary principles Liquidity, safety and
  diversification
• Written investment policy statement required
• Foreign investments permitted in EU and OECD
  countries
• Maximum limits by asset class apply until EU
  accession
• Foreign investment limit much higher than
  mandatory fully funded system (50)

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Pension Benefits

• Can begin up to 10 years prior to standard
  retirement age in mandatory pension system
• 52 women, 54 man
• Permitted payment options
• Lump-sum
• Periodic withdrawals
• Annuity purchase
• Combination of above
• Mandatory lump-sum for small account balances

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Taxation

• EET structure
• Individual granted Personal Income Tax Return on
  contributions to Voluntary Pension Fund (up to 6
  average net wages)
• Sponsor gets personal income tax exempt for
  contributions to occupational pension schemes (up
  to 6 average net wages)

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System safety

• MAPAS
• Licensing requirements
• Investment rules and regulations
• Asset segregation
• Custodian
• Marketing rules
• Reporting and disclosure

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MAPAS

• Supervises and controls mandatory and voluntary
  fully funded pension system
• Licenses pension companies and pension funds
• Issues regulations
• Controls marketing practices
• Conduct off-site and on-site audits
• Regularly gathers and analyzes data
• Takes legal or regulatory actions, as appropriate

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Licensing requirements (1)

• Pension companies and pension funds must be
  licensed
• Pension companies must show
• Financial strength
• Experience in financial sector
• Experienced and ethical management team
• Credible business plan
• Proper investment policy

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Licensing requirements (2)

• Three types of Pension Companies shall exist
• Mandatory Pension Company (share capital not
  less than 1,5 million EUR)
• Voluntary Pension Company (share capital not
  less than 0,5 million EUR)
• Joint Pension Companies (share capital not less
  than 1,8 million EUR)

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Licensing requirements (3)

• Same criteria for founders of Mandatory Pension
  Company and for founders of Joint Pension
  Company
• Domestic or foreign legal entity
• 20 mil. Euros
• Minimum investment grade level rating in case of
  a foreign company

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Licensing requirements (4)

• Different criteria for founders of Voluntary
  Pension Company
• Founders owning 51 of the Pension Companys
  share capital may be a financial institution with
  own capital
• 9 mil. Euros if bank
• 3 mil. Euros if insurance company
• 0.5 mil. Euros if company for management of
  investment funds
• 1 mil. Euros if foreign Pension Management
  Company
• 5 mil. Euros if other financial institution

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Licensing requirements (5)

• Other criteria for founders
• Have been registered and existing for a minimum
  of three years
• Continuous solvent existence in continuity,
  whether in the Republic of Macedonia or abroad
• Permanent management team comprised of competent,
  expert and experienced persons.

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Licensing requirements (6)

• A founder of a Voluntary Pension Company owning
  51 or more of the share capital may be a legal
  entity that owns more than 50 of the management
  shares of a financial institution satisfying all
  previous criteria.
• A founder of a Voluntary Pension Company owning
  less than 51 of the share capital may be a legal
  entity satisfying all previous criteria expect
  the ones related to capital

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Investment rules and regulations

• Act in best interests of members
• Required investment policy statement
• Permitted and prohibited investments
• Diversification requirements
• Safety (rating) requirements
• Liquid investments (regularly traded securities)
• Recognized exchanges
• Conflict of interest prevention rules

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Custodian

• Single custodian for all assets
• Macedonian banking license and custodian license
• Meet minimum capital and independence
  requirements
• Sub-custodians for foreign assets
• Primary functions
• Hold assets on behalf of members
• Settlement of all trades
• Supervise sub-custodians
• Ensure compliance with pension law

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Marketing rules

• General rules
• No gifts to induce membership
• No misleading information
• No performance predictions
• Contracts signed by sales agent
• Sales agent requirements
• Examinations (proper knowledge)
• Ethical standards
• Licensing
• Registry of active agents
• No use of associates for marketing
• Advance MAPAS approval of all marketing materials
  and advertisements

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Reporting and disclosure

• Individual account statements
• Annual reports
• Investment policy statement
• Periodic reporting to regulator (many items on
  daily basis)
• Standardized rate of return calculations and
  presentation

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Expected size of market(base case scenario)
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Expected size of market(optimistic scenario)
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Expected size of market(pessimistic scenario)
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Reasons to start Voluntary Pension Company

• Additional financial service for firms already
  active in Macedonia
• Door-opener to sell other financial services
• Opportunity to gain experience and participate in
  mandatory pension system in the future

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Statistics (1)

• GDP(2005) 4,534 mil. US
• GDP per capita (2005) 2,226 mil. US
• Increase in GDP (2.2007 / 2.2006) 4
• Retail prices (2006 / 2005) 103.2
• Consumer price index (2006 / 2005) 103.9
• Source State Statistical Office

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Statistics (2)

• Economic activity of population (2007) 869,000
• Number of employed persons according LFS (2005)
  545.000
• Unemployment rate, ILO definition (2.2007) 35
• Average net paid wage per employee (8.2007)
  denars 14330 (appr. 230 Euros)
• Source State Statistical Office

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Statistics (3)

• Population structure (2002)

Life expectancy and average age of
population(2002)
Source State Statistical Office
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Statistics (4)

• First pillar Statistics (2006)
• Registered Payers (Employers) 53,241
• Contributors 394,883
• Contributors structure
• up to 40 years of age 41.8
• 40-50 30.4
• 51 27.9
• Pensioners 269,681

Source Pension and Disability Insurance Fund of
Macedonia
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Statistics (5)

• Top 10 biggest companies in Macedonia

Source Euro Business Center - Skopje, 2007
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Statistics (6)

• Top 10 most successful companies in Macedonia

Source Euro Business Center - Skopje, 2007
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Statistics (7)

• Biggest companies in Macedonia territorial
  distribution (out of 200 biggest)

Source Euro Business Center - Skopje, 2007
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Statistics (8)
Most successful companies in Macedonia
territorial distribution (out of 200 biggest)
Source Euro Business Center - Skopje, 2007
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Thank you for your attentionmtsp.gov.mkmapa
s.gov.mk